Commercial sector slowdown

Investor sentiment in the commercial sector is falling, as office capital values drop

Heading into 2017, the construction industry is proving resilient to the changes in economic conditions, specifically Britain’s vote to leave the European Union. In the short term, the negative impacts have been shown to be short-lived, if there have been any at all. However, using this to conclude there will be no impact whatsoever is misguided. The fact remains that fundamentally nothing has yet changed, so one would not expect any transformation in output to have occurred either in the economy as a whole or the construction industry in particular. The latest statistics from the Office for National Statistics (ONS) show the industry is experiencing fairly benign conditions at the moment. To be sure, output in November 2016 was 0.2% lower than October 2016, but this still represented a 1.5% rise on November 2015. The private housing sector remained the major component of this growth, with output 12.5% higher in November 2016 than 2015.

With a recent report from Halifax showing first-time buyer levels are at their highest since the financial crash of 2008, it is no surprise new private housing growth is so strong. As long as government schemes such as Help to Buy remain in place and consumer confidence more generally remains high, the outlook for housebuilding, and by extension the construction industry, remains positive.

Of particular interest this year will be the private commercial sector, comprising commercial offices as the biggest component. There is plenty of anecdotal evidence to suggest investor sentiment in this sector is falling, and CBRE reported this month that office capital values dropped by 2.5% in 2016. It is expected that this will have a knock-on effect for 2017’s office construction.

While the latest ONS statistics suggest commercial output remained strong with levels of activity 2.9% higher in November 2016 than the year before, it is the pipeline which will give an idea of the future trajectory of output. Therefore, since contract awards in 2016 were 32.6% lower than 2015, the sector could face challenges in the year ahead. When looking for a “Brexit effect”, the commercial sector is most likely to show signs of it.